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EU
Member States may maintain in force derogations as a
transitional measure, subject to certain conditions under
Article 28(2) of the Sixth VAT Directive. The UK applies a
zero-rating for VAT in respect of the supply of food, in
conjunction with the right to deduct input tax.
Confectionery
is an exception to such favourable tax treatment and is
taxed at the full rate. There is an exception to that
exception for cakes and biscuits, which are subject to the
zero rate of tax applying to food. Biscuits wholly or
partly covered with chocolate, however, are regarded as
confectionery and taxed accordingly at the full rate.
Unjust
enrichment
Since
1973 VAT had been charged on the chocolate covered
marshmallow teacakes sold by Marks & Spencer plc at
the standard rate as HMRC treated them as
chocolate-covered biscuits.
In
September 1994, however, the Commissioners acknowledged
that the teacakes ought to have been classified as cakes
and, as such, zero-rated for tax purposes.
Marks
& Spencer made a claim in that respect for repayment
of the full £3.5 million of VAT for which it had wrongly
accounted over the years.
HMRC
submitted as a defence that Marks & Spencer had passed
on 90 per cent of the VAT to its customers and that a full
refund would mean “unjust enrichment” for the
retailer.
The
VAT and Duties Tribunal upheld the HMRC defence and ruled
that Marks & Spencer was entitled to recover only the
10 per cent of the sum claimed that had not been passed on
to the public.
The
House of Lords wanted to clarify whether the “unjust
enrichment” defence could be invoked to refuse a full
refund of VAT under existing, non-harmonised tax
legislation.
Equal
treatment and fiscal neutrality
Advocate-General
Kokott said that the question of whether a mistake had
been made in the original classification of chocolate
covered teacakes was undisputed. She added that it was,
however, necessary to establish whether M&S was
entitled to a VAT refund in view of the fact that it had
passed the VAT on to its customers.
Marks
& Spencer pursued the dispute further to the Court of
Appeal. The retail chain claimed that Tesco had obtained
tax refunds on the same principle in the light of a
revision of the tax treatment of mineral water and fruit
juice. It argued that the “unjust enrichment” argument
had not been invoked against Tesco, on the ground that the
tax had been passed on to the customers.
The
UK government did not provide information on a VAT refund
to Tesco to the European Court, but the Advocate-General
said that Tesco’s alleged refund was of no consequence
to the application of the principle of neutrality.
Kokott
said, however, that if the tax authority charges tax at
the standard rate on the supply of Marks & Spencer’s
teacakes, but applies the zero rate of tax to comparable
products of other suppliers, the principle of equal
treatment and fiscal neutrality would be undermined.
Public
interest
Marks
& Spencer had stressed that the refusal to grant it a
refund would, in its view, lead to the unjust enrichment
of the tax authority itself. It argued that its customers
who ultimately paid the VAT that was not due were the
persons entitled to the refund.
The
UK authorities maintained that they had used the wrongly
raised tax revenue in the public interest, with the result
that the customers of Marks & Spencer also derived
benefit from it.
Kokott
said that EU Court should not get involved in deciding
whether the UK government or Marks & Spencer was
better able to spend the £3.5 million in VAT in the
public interest.
Source
: Director of Finance online - UK, dated 14/12/2007
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